Chapter $12-$ Project Risk Analysis

The managers of United Medtronics are evaluating the following four projects for the coming budget period. The firm's corporate cost of capital is $14$ percent.

$\backslash$table$[[$Project$,$Cost,IRR$],[$A$,$$$15,000,17\%,],[$B$,$$$15,000,16\%,],[$C$,$$$12,000,15\%,],[$D$,$$$20,000,12\%,]]$

a$.$ Which projects should be accepeted and what is the firm's optimal eapital budget?

b$.$ Now, suppose Medtronic's managers want to consider differential risk in the capital budgeting process. Project A has average risk, $B$ has below$-$average risk, $C$ has above$-$average risk, and $D$ has average risk. What is the firm's optimal capital budget when differential risk is considered? $($Hint: The firm's managers lower the IRR of high$-$risk projects by $3$ pereentage points and raise the IRR of low$-$risk projects by the same amount.$)$

Adjust the projects' IRRs for differential risk and provide your conclusions.

$\backslash$table$[[$Project$,$Cost,IRR$],[$A$,$$$15,000,],[$B$,$$$15,000,],[$C$,$$$12,000,],[$D$,$$$20,000,]]$